In a speech on May 13, 2014, Senator Marco Rubio (R-FL) proposed “giv[ing] Americans who do not have access to an employer sponsored plan the option of enrolling in the federal Thrift Savings Plan.” With this proposal Senator Rubio joined a growing group of policymakers and employee-advocates calling for ‘doing something’ to help the 75 million (Senator Harkin’s (D-IA) number) American workers not currently covered by a retirement plan. Senator Rubio has (thus far) provided no details on how his proposal would actually work.
In this article we are going to consider what “[o]pening Congress’ retirement plan to the American people” would mean. We do so for several reasons: (1) Senator Rubio is not the first to suggest using the TSP to address the problem of the uncovered. Other reformers have made similar proposals and view the idea as generally viable. (2) A federal retirement savings alternative may be attractive to some employers who currently maintain 401(k) plans. (3) If it becomes popular – if a lot of Americans begin using the TSP as their preferred retirement savings vehicle – it may put pressure on companies that sponsor their own 401(k) to conform to the TSP’s low-cost, passive investment style. (4) If the TSP begins to attract really significant amounts of money, it will have an effect on the market as a whole, raising issues about government management of capital and capital formation.
In our article Expanding retirement savings opportunities we discussed Congressional proposals to expand coverage, including Senator Harkin’s USA Retirement Funds (USA RF) proposal, proposals to ease rules on multiple employer plans and the Administration’s auto-IRA and myRA proposal. Our most recent article, State retirement/auto-IRA legislation, discusses initiatives at the state level to implement auto-IRA legislation.
Senator Rubio’s proposal is interesting both because he (a Republican) is joining an effort (covering the uncovered) that currently is mostly led by Democrats and because of the solution he is proposing – leveraging the Thrift Savings Plan (TSP). The idea of leveraging the TSP to provide ‘cheap’ investment management for retirement savings is not brand new. In her 2007 “Guaranteed retirement accounts” proposal Professor Teresa Ghilarducci suggested that “accounts [be] managed by the Thrift Savings Plan or similar body.” And other retirement policy reformers have floated the idea.
Basic challenges to expanding retirement savings coverage
As we have discussed in our earlier articles, there are several structural issues presented by expanding retirement savings:
- What savings vehicle do you use? The majority approach of advocates of expanded coverage is some sort of IRA arrangement – this is the vehicle in auto-IRA proposals, the Administration’s myRA proposal and state coverage initiatives. Senator Harkin, however, has proposed creating a totally new sort of plan, the USA RF (we note, in this regard, that Senator Harkin has still not released a tax proposal describing tax treatment of USA RF savings). There are a variety of sub-issues here; certainly one of the biggest is, if you succeed in getting a lot of currently uncovered workers to start saving on a tax-advantaged basis, how, in an ‘austere’ budgetary environment, do you deal with the revenue loss?
- How much do you involve employers? Most of the ‘uncovered’ are employees of small employers. For small employers, the main obstacle to establishing, e.g., a 401(k) plan is the inability to cover the overhead entailed in maintaining one. A similar issue exists with respect to another major ‘uncovered’ population: seasonal and part-time employees. Auto-IRA proposals generally anticipate the employer as providing only a payroll deduction utility. A major issue for reformers is whether to mandate that employers maintain, e.g., an auto-IRA and do the minimum to administer an automatic enrollment program.
- What do you do with the money? It’s anticipated that the actual retirement savings by the currently uncovered would generally be small accounts that would be less attractive to money managers, so finding firms willing to manage this money has been a challenge. Alternatively, ‘federalizing’ management of this money presents policymakers with the prospect of the federal government making decisions about the allocation of conceivably significant amounts of capital. The possibility that that process might be politicized (e.g., some version of politically correct social investing) is of concern to many policymakers.
In considering these issues one is struck by the parallels to the Affordable Care Act, and experience with the ACA has colored some of the debate (e.g., resistance to employer mandates).
Leveraging the TSP for the uncovered
Like the Administration’s myRA proposal, Senator Rubio’s proposal to ‘open up’ the TSP to uncovered American workers only addresses issue 3 – what do you do with the money? The other questions about covering the uncovered – about the savings vehicle, tax policy and employer involvement – are unaddressed. As we said, Senator Rubio has thus far provided no details on how his proposal would work – e.g., how exactly retirement savings from uncovered American workers would get into the TSP.
But let’s consider the practical consequences of using the TSP as a sort of master collective investment trust. The first issue to consider is: how much money would be involved? Currently the TSP has around $170 billion in assets. If extending ‘coverage’ to the uncovered would add, say, another $10 or $20 billion, then one assumes that the TSP could absorb that increase without any fundamental changes. And (presumably) this policy innovation would have no significant effect on 401(k) plans generally.
If, however, and as most reformers hope, the 75 million uncovered American workers begin saving meaningful amounts and depositing those savings in the TSP, how those savings are being invested will begin to matter. Let’s consider briefly how TSP investments currently work.
Name of Fund
|G Fund||F Fund||C Fund||S Fund||I Fund||L Fund|
|Government securities (specially issued to the TSP)||Government corporate, and mortgage backed bonds||Stocks of large and medium-sized U.S. companies||Stocks of small to medium-sized U.S. companies (not included in the C Fund)||International stocks of 21 developed countries||Invested in the G, F, C, S, and I, funds|
|Barclays Capital U.S. Aggregate Bond Index||S&P 500 Index||Dow Jones U.S. Completion Total Stock Market Index||Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index|
All funds other than the government securities fund are index funds. (In what follows, we are going to ignore the G Fund – it’s not clear that these special TSP government securities would be available to non-federal workers.) The net expense ratio for the plan is under 3 basis points.
One assumes that these funds, because they are index funds, generally have the capacity to absorb significantly more investment dollars. Indeed, up to a point, as scale increases costs might conceivably go down further.
So far so good. If the only thing that happens as a result of opening up the TSP to the uncovered is that some employees not currently covered by a 401(k) plan get efficient coverage by leveraging the scale and efficiency of the TSP, few would object.
But, especially if participation by non-federal employees in the TSP is widespread, there are some secondary consequences that may disturb some policymakers and some plan sponsors.
If a ‘regular’ American worker with no employer-sponsored 401(k) plan can get access to a plan that, as Senator Rubio says, “is one of the most efficient savings plans in America,” why won’t a lot of current 401(k) plan participants want the same thing?
A meaningful number of sponsors view their 401(k) plan as something they ‘must have’ simply because their employees demand it. For these employers the 401(k) plan is a tax planning tool they offer for their employees’ convenience. It is not an important HR tool. If an alternative retirement savings vehicle is available – the TSP – that is more efficient than anything they could buy in the market, why wouldn’t these sponsors simply terminate their 401(k) plan and tell their employees to sign up for the TSP? The appeal of doing that might depend in part on whether the tax benefits for TSP savings were the same as those for a company-sponsored 401(k) plan. And it is not at all clear why they shouldn’t be the same.
Moreover, if TSP savings by non-federal employees becomes widespread, even sponsors that do view their plan as an important HR tool would be confronted with a competing investment vehicle with very low costs. Would they come under pressure to either meet those costs or (somehow – again we have no real idea how Senator Rubio’s proposal would work) ‘free’ their employees from the employer plan so that they could participate in the TSP?
At some point, TSP capacity will become a problem. The TSP uses an all-index investment strategy. Even Bill Sharpe has said, “At some point that [too much indexing] could become a concern.” The availability of low cost passive investment returns depends on active ‘alpha-seeking’ activity to make the relevant market efficient. No doubt TSP assets would have to increase significantly before the balance between active and passive investing in, e.g., the large cap market would be thrown out of equilibrium. But some sort of effort should be made to determine (or at least make a guess at) at what point such a disequilibrium would be a concern.
Does it matter – might it affect investment policy – that the TSP is currently run exclusively for employees of the federal government? Those employees share a profile and, generally, a benefits package and set of employment ‘conditions’ (for instance, it’s generally more difficult to fire a government employee). The TSP’s investment policy was, presumably, constructed with those features of the TSP participant population in mind. If the TSP is opened to ‘just anybody,’ might it be necessary to change current policy, conceivably in a way that might be good for the new population but less good for federal workers?
As the saying goes, “Nothing is impossible for the man who doesn’t have to do it himself.” One senses that “giving Americans the option of enrolling in the federal Thrift Savings Plan” may turn out to be harder than it sounds. The TSP is set up inside the federal government, for federal workers, using federal systems. Building an external system that interfaces with thousands of small employers and 75 million individual non-federal employees may not be easy and may not always work that well (see, for instance, the ACA rollout).
Perhaps the most disturbing question about the ‘federalization’ of retirement savings investment is whether it could also mean the politicization of that investment. The TSP Investment Board is appointed by the President. Currently it is composed of the sorts of individuals you would expect (and hope) to see – investment professionals. But if the assets of the TSP increase significantly as non-federal employees are allowed to contribute, how TSP assets are invested may become a political issue. It’s not hard to imagine campaigns calling for ‘disinvestment’ in certain sorts of companies – companies with politically incorrect labor or environmental policies, for instance. Similarly, which company or companies are hired to manage TSP assets may become a lobbying contest.
We will continue to follow this issue.